DISABILITY INSURANCE – BEFORE A DISABILITY

First off, I would like to thank Michael Taylor, Director of Brokerage, of Hunter McCorquodale Inc., for suggesting this approach. Any blame for the content lies with me, and credit and praise for the idea go to Michael.

Disability Insurance is COMPLICATED!

No, it is just DIFFERENT! In life, you have had to learn ideas, words, and concepts, etc.  You did not know all these things when you started out, you learned them as you went along, to the point where they have become second nature.

On the other hand, I do not know how to drive, so everything to do with a car is complicated for me, and I do not want to even think about a standard shift. For the majority of the population, however, operating a car is probably as simple as breathing. My objective here is to make Disability Insurance even simpler to understand than driving your car.

Before beginning with the terminology, let’s take a look at the most basic element of all: the types of contracts available. Our industry is infamous for making things difficult, so I will strive to make it easy.

There are 3 types of contract:

1. Non-cancellable and Guaranteed Renewable: A complicated way of saying that “Everything (wording, prices, EVERYTHING) is guaranteed.”
2. Guaranteed Renewable: A complicated way of saying that “EVERYTHING is guaranteed EXCEPT the price.”
3. Optionally Renewable: A complicated way of saying that “NOTHING is guaranteed.”

Now what do these three concepts mean to you – the consumer?

I am going to use the analogy of a mortgage. Those of us in our 60s remember when we could buy a home and the mortgage rate and conditions were guaranteed for the entire period of the mortgage, that is to say, for 20 or 25 years. Our parents would buy the house knowing that whatever the monthly mortgage payment was, it would NEVER change unless, of course, they remortgaged. This is contract option #1. You buy the plan today and regardless of any change in job, health, income, country of residence (ANYTHING) nothing will ever change.

Contract option #2 is today’s mortgage. You buy the house today and the payments are guaranteed for a limited period of time (for example 5 years). You know the house belongs to you, but you also know that the monthly payment can periodically change.

Contract option #3 would be like living in a motel. The daily rate can change, you can be asked to move, you never really know what the future will bring. You know what you have TODAY; you know what it costs TODAY, as for tomorrow? Who knows?

Let’s bring it back to disability insurance. Under Options #1 and #2, I can tell you the conditions of the policy, the amount you will collect. The only difference is that, for Option #1, I can also tell you the price you will pay for protection for the entire period of the policy; and, for Option #2, I can tell you that the price is subject to change but I cannot project the timing or the amount of those price changes.

For Option #3, I can tell you the rules as they apply today, but tomorrow they may change. There is no way I can predict the future.

By the way, Option #3 is any group plan, any association plan. There is nothing significantly wrong with Option #2. Option #1 is certainly superior but insurers are VERY reluctant to increase prices for “in force” policies as they know that this creates tremendous motivation for healthy clients to look elsewhere – leaving them with mostly unhealthy clients – and even worse claims experience. Frankly, I would avoid Option #3 if at all possible. I hate to play a game which has no rules. Actually, there ARE rules; it is just that they can be changed mid-game, and sometimes, even mid-play.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

DO NOT TOTALLY DEPEND ON YOUR GROUP LONG TERM DISABILITY INSURANCE! AND THIS IS THE BIG REASON!!!

All of the weaknesses pointed out in my last blog related to terminology: how easy or how difficult it can be to collect benefits, what problems are excluded, and whether you need to be “totally” disabled. I am not trying to say that these issues are unimportant, but they pale in comparison to the issue of whether or not the coverage will be there at all when you need it most.

Group insurance is based on two major assumptions:

(1) You will be working for the firm that offers the coverage when you become disabled and

(2) That firm will still offer the coverage.

Neither of those assumptions is reliable.

We no longer work for one employer. Statistics Canada says that we will have 3 careers and 8 employers on average over our working lifetime. Given that statement, there is at least a solid possibility that the benefits you may have at one point in your working life may not be there when you need them most.

In addition to that, we are seeing a major move to hire under contract, rather than as true employees. There is a solid financial reason why companies are doing this and it is unlikely to change. Canada and the United States are two of the most expensive economies in the world. One of the largest reasons for that is the generosity of employee benefits offered in North America especially as compared to the developing world and China and India in particular. If we wish to be competitive in this changing world, we need to find a way to lower those costs. My sources tell me that employee benefits increase payroll costs by 30%. One of the ways we have chosen to reduce these costs is by reducing or even eliminating employee benefits and leaving it up to the individual worker to protect himself. A modern approach (sometimes referred to as the “cafeteria approach”) consists of the employer advising its employees that $X is available to spend on benefits. They give the employees a list of benefits to choose from and let them choose the ones they want most. For example, the employer may give each employee a budget of $1,500 and list Medical, Dental, Vision, Life Insurance, Dependent Life Insurance, Short and Long Term Disability, etc – each of these with their individual cost indicated. The problem is that many of us tend to think short term without taking the time to truly understand what can impact us most severely.

I am wearing a fairly expensive ($1,500) pair of glasses but if I break or lose them, the financial impact on me is tiny compared to losing my income for 3 to 6 months. On average, a disability that lasts 3 months will most likely extend to 5 years.

Certainly I might break my glasses, but which hurts more? Losing my $1,500 glasses or losing the $250,000 (5 years at $50,000 annually) income that pays for them?

Let’s illustrate what you gain from having even a small personal policy. You are working at a job you like (or do not like). One morning, you find out (or decide) that you no longer work there. Let’s create an ideal scenario:

You are offered your dream job. A job that will allow you to work in a location convenient to home with a group of people you know, like, and respect. A job that matches your abilities, meets your desires, and offers a 50% salary increase. Would you accept it? What would happen if there were no employee benefits available? Would your decision change if you were a Type 1 Diabetic (or had some other significant condition)? This is where you would immediately see the benefit of the personal coverage. It gives you flexibility.

For several reasons, you should have individual disability insurance rather than group disability insurance. The protection offered is superior and you can count on it being there. Why then, do we not all buy individual insurance? There is the minor issue of BUDGET. Group insurance may be mandatory and is always less expensive (you get what you pay for). Recognizing this, what are your options?

First, establish the amount that you can afford to purchase individual insurance and guarantee your right to buy more should your situation change. The higher that amount, the more you can do RIGHT NOW – but any amount will buy you some flexibility and control. In this situation, there are 4 suggestions:

1. ALWAYS buy a 90-day Waiting Period for your individual policy. It costs about 50% of what a 30-day Waiting Period costs (waiting longer than 90 days has very little real impact on the cost; a 120 day Waiting Period saves you about 2.5% - even a 730 Day (2 YEAR waiting period only reduces the cost by about 21% - and you lose potentially 21 months of benefits) 
2. Buy a “Guaranteed Insurability” feature (I might even put this as #1) as this is what gives you the flexibility should you lose your group insurance for any reason;
3. Make sure that you are protected in your “Regular Occupation” for the duration of any claim. You do not want the insurer to be able to say “You are now able to do something else – so we cease all benefits”
4. Purchase some protection against “non total” disabilities.

The “Guaranteed Insurability” feature does two things: it allows you to purchase disability insurance with no proof of health and it guarantees your original occupational classification. Disability policies are priced (and the wording may differ) based on the occupational group the insurer considers your job to fall into. Two things which tend to improve your classification are (1) how long you have been with a given employer and (2) your established level of income. Two things are certain, if you change jobs you lose all of the benefits of #1 and if your income reduces or if you go “on contract”, you most likely lose #2. A properly designed, and priced, individual plan will solve all of these issues.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

DO NOT TOTALLY DEPEND ON YOUR GROUP LONG TERM DISABILITY INSURANCE!

It is bizarre that very few financial advisors would suggest relying solely on Group LIFE; however, these same advisors have no problem allowing their clients to depend entirely on their Group Long Term Disability insurance. I will certainly not dispute that the amount of the Group Life insurance may well be inadequate, but other than needing more insurance, there is absolutely nothing wrong with the underlying protection.

On the other hand, there are significant holes in Group Long Term Disability insurance. Even if the group life insurance is all that a client has, the insurance can be converted on leaving the company, regardless of the insured’s state of health. This is rarely true of LTD and, even when it is, there may be requirements that the client be employed; requests for proof of income, or limitations on the policy wording. To my knowledge, one carrier actually seems to use group terminology for their converted individual policies. (This is not a good thing for clients) More on that in the next paragraph.

Group LTD generally protects only against total disabilities – or requires that partial disabilities be preceded by a period of total disability, which may work in the case of a heart attack, but has significant issues in the case of cancer or anything progressive or degenerative. Further, if you are someone who would continue to work, though not at full capacity, or if your job is consultative or communication-based, a total disability is not easy to imagine. I earn my living with my brains and my mouth; as long as I can think and talk, I am able to work.

Many group plans protect you for only 2 years if you cannot do your own job. Thereafter, they will probably require that you be unable to do any reasonable job. Yes, there is jurisprudence that states that new job must give you at least half of what you were previously earning, but how many of us could handle our obligations at half our current pay? Also the job does not have to be available, you just must be deemed capable of doing it. Insurers tend to get very theoretical here. I remember the father of a former co-worker who was deemed capable of returning to work as a file clerk. Even if we accept that the job would probably meet the income requirement (he had been a handyman at a school) there was one problem. He had a significant back problem. He would have very little problem working in the top drawers but would have a HUGE problem accessing the bottom ones. Also, when faced with a choice between hiring a healthy employee versus hiring one returning from 2 years of disability, which one would the new employer be more likely to hire? Yes I know discrimination against the disabled is illegal, but employers can always find an excuse.

Exclusions: Individual plans generally exclude pre-existing conditions (e.g. I have had a back problem since I was 5 – due to polio – and they will not cover that); any disability due to a war; any disability incurred while you are in prison; and any disability due to normal pregnancy (complications are generally covered). Group Disability will generally exclude many more conditions and some of those exclusions (self-inflicted injuries and criminal acts) are NOT as innocent as they may sound.

“Not portable” – if you lose – or leave – your job, almost no group insurance will follow you (and if it does, the coverage may be restricted. What happens if you get laid off? Fired? Just decide to leave? Based on Statistics Canada numbers, we have 3 careers and 8 employers over our working lifetimes.

“Only what you personally declare to the tax man” is covered. If you are self-employed (particularly if you are incorporated) – or if you “split income” with family members – or if you have “perks” which do not show up on your tax slip – group will not protect it. Individual policies will.

“What happens if my income drops?” With Group – so does your coverage. Individual? Stays the same

“What happens if I change occupations? Leave the country?” You lose your group in most cases. Individual coverage? Follows you – and prices and conditions do not change.

“What happens if my disability is intermittent?” The vast majority (over 90%) of group plans will not pay until the disability becomes permanent. Individual plans are MUCH more flexible.

“What happens if I choose to continue working beyond the “normal” retirement age of 65?” Your group terminates – individual continues

Individual offers a better definition of what constitutes disability, it offers coverage for both “total” and “partial” disabilities - Group only covers “total;” Individual also offers fewer exclusions.

Up next: The most important reason to buy Individual versus Group still to come…

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

“YOU CANNOT BE PARTIALLY DEAD!”

As the title of this issue clearly states (and as all of you hopefully know) partial death does not exist. You are either dead or you are alive. Disability, on the other hand, is not an “either/or” situation. You may be totally able to work; totally unable to work; or your ability to work has been reduced. It depends on the specific condition that you may have; the stage it is at (early or advanced); the type of work that you do; even the motivation you have to work. For example, the whole concept of “pain threshold” is very subjective. I may be severely affected by slight pain; whereas you may be able to work in almost utter agony. Also – if I am a truck driver, total disability is much more likely than if I am an office worker; particularly if my job largely consists of knowledge and communication. For example, if I work at a desk answering phone calls from customers, voice-operated technology would allow me to continue working in a state of health which might seriously impact me if I worked in construction instead.

Imagine a situation where fire caused $50,000 damage to your $100,000 home, and your insurer told you that since it was not a total loss; they are not liable to pay! Given that not all disabilities are total, it can be very important to have coverage against both total and “non-total” disability.

That being said, there are two approaches to insuring “non-total” disability.

            The first approach – “partial disability” – looks at what parts of your job you can do and/or how long you can work for. It insures your time and your duties. Officially, the definition states that you “must be unable to perform one or more of the important duties of your regular occupation or that you must be able to perform all of the duties for less than half the time normally required to perform them.” This definition does not consider the income you earn while “partially disabled”. Generally, it pays 50% of the basic monthly benefit for as long as 36 months (depending on the carrier) of partial disability; then the benefit reduces to 25%.

            The second approach – “residual disability” – defines disability based on the income lost due to disability. If the loss is less than 20%, no benefits are payable. If the loss of income is between 20% and 80%, benefits are paid equal to the loss of income. If the loss is 80% or more, full benefits are paid.

I often say that “partial” insures what you can do and “residual” insures how well you do it. Which is “best”? Frankly, it depends on YOU and your situation at the time you become disabled. If your income is significantly related to your efforts - if you bill (or are paid) for hours worked or paid based on your own success (commission sales, for example) then “residual” is probably best for you. On the other hand, if you are “protected” by employees - if your income is less dependent on your own efforts OR if you prefer not to submit financial information during a disability, then “partial” may be best.

There is no question that it can be easier to collect “partial” benefits, but the trade-off is that if income is significantly affected by your disability, you may not collect as much as you would under the “residual” option.

How long are benefits payable? They may be payable for 6, 12, or 24 months or for 5 years or to age 65.  Generally speaking, the shorter durations are for “partial” benefits; and 24 months or longer usually offers both forms.

Products may offer only partial benefits, only residual, or both.

Another issue to consider is that our situation may change with time. What may be best for us in 2010 may not be the best choice in 2016. The most flexible contracts offer both partial and residual and allow you to choose at time of claim the one best suited for your situation at that moment.

The important thing is to have SOME protection against non-total disabilities. This means that you will not be faced with an “all or nothing” situation should you become disabled. Your lifestyle will be protected no matter how the disability affects you.

Back in 3 weeks to look at some other optional features that may be attractive.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

DISABILITY INSURANCE IS NOT COMPLICATED!

Disability Insurance is not complicated, it is just different. What is the definition of “death”? Well…if our brain is not functioning, if we are not breathing, and if our heart is not beating, we are either a politician or we are dead. Obviously death has a definition; we can look it up in the dictionary, but we all know what it means.

On the other hand, a disability is not so easily defined, or I should say, the definition is not as unanimous. Does disability mean that we cannot do our own job? Does it mean that we cannot do any reasonable job?  Does it mean that we cannot work at all? Disability can be “total” – eliminating our ability to work – or “partial/residual” – reducing our ability to work but not completely eliminating it. The effect of a particular disability depends on the job that we do. For example, I cut the median nerve in my right hand in a work accident in 1963 and now have limited sensation in my right hand. It has some effect on my ability to work as I cannot write for an extended period of time, but it has no real effect at all. On the other hand, if I were a surgeon, a dentist, or a jeweler, I might well be totally disabled, as I am right handed and it would definitely impact my ability to do those jobs.

Let us return to the definition of total disability. There are three basic definitions of what constitutes total disability. In order of generosity, they are:

1. “Own Occupation” – Under this definition, you are considered totally disabled if you are unable to do your job and you are under the care of a doctor appropriate to the nature of the disability that you have.
2. “Regular Occupation” – Under this definition, you are considered totally disabled if you are unable to do your job, you are not working in any other job, and you are under the care of a doctor appropriate to the nature of the disability that you have.
3. “Any (or any reasonable) Occupation” – Under this definition, and which we rarely see in the early stages of a disability, you are considered totally disabled if you are unable to engage in any reasonable occupation based on your education, training, and experience (some may also include your income as a determinant of “reasonable”) and you are under the care of a doctor appropriate to the nature of the disability that you have. An even weaker definition eliminates the whole area of “reasonable” and you basically must be unable to do anything.

“Own occupation” can be very attractive, because you can actually economically profit from a disability. If you cannot perform your duties, the company will pay the full benefit under your policy, even if you earn significant income from another occupation. There is a dentist in Montreal who is unable to practice dentistry because of vision problems. He is collecting total disability benefits even though he is working full time, and very successfully, as an insurance advisor. Insurance is supposed to protect us from a loss - not allow us to make money. Therefore insurance companies are limiting the occupations they will offer this feature to for several reasons. First, companies divide occupations into groups (or “classes”) - the higher the “class” the lower the risk for the insurer and they therefore can offer more options, better features, and more guarantees, while keeping the cost low. Second, with “own occupation,” the appeal is really only for those professions that include a “physical” element, surgeons and dentists for example. This is because the disability, while preventing you from working in your current occupation, must also allow you to work in another profession. Frankly I fail to see how psychiatrists, for example, would benefit from this feature. They earn a living by listening to and talking with clients. If they are unable to do that, what will they be able to do?

To me, and my 40 years of experience in this area, the “regular occupation” definition is ideal. It protects against a loss; the insurer does not care what you can do - only what it is that you actually do!

As long as I cannot do my job, and I do not “choose” to work elsewhere, I will be paid. This definition is offered by all the major carriers to basically all occupations. The only issue is “Does (or can) the definition change after 2 or 5 years of disability?” Some carriers include “regular occupation to age 65” as part of their basic policy; others start with a limited period “regular occupation” definition and offer an option of extending it. It is my professional opinion that regular “occupation to age 65” should always be chosen. I do not want the insurer to have the right to re-assess our clients.

Back in 3 weeks to discuss “non-total” disabilities where we will examine cases in which a condition exists that reduces our ability to work without eliminating it completely.

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance

Protect your most important asset

Introductory remarks:

The purpose of this blog is to help prospective and existing clients, and advisors understand this area of insurance: an area that many find complicated, confusing, and just plain difficult. It is an area where I have worked for many (try 40) years and a topic that I am very passionate about. I will address why I am so passionate about this topic at a later date. For now, let me introduce the topic and encourage questions, comments, suggestions, and most of all participation.

Before I start the “hard” part, let us look at what Disability Insurance really is. "Why is Disability Insurance important and why should it be included in a financial plan?” The answer to that question prompts another question: “How important is my income to my financial plan?” If your answer is that your income is not important, that you are so financially well off that your income is insignificant to you, then Disability Insurance is truly not an important issue in your life.

If, on the other hand, you are like most and your income is significant to you, then you should seriously consider protecting it. Most of us feel that we need life insurance to protect our families and businesses during our “growth” stage – while we are building and accumulating to reach our goals, be they financial, professional, personal, etc. If we die while our children are still at home, and before we have built our “nest egg,” then we need life insurance to cover our outstanding mortgage(s), provide for our children’s education, or for whatever purpose we feel is important.

While I will not attempt to lessen the financial and emotional impact of death, a disability is far more devastating financially. If I die my income dies with me and needs to be replaced, however, my consumption also dies; I no longer eat, require clothing, or create additional expenses. If I am disabled, my income dies, or is reduced, but my consumption continues and may even increase due to medication, special equipment, etc.

Our most important assets are not our home(s), our savings or investments, or our car(s); our most important assets are both our health and our ability to generate an income. All that we do is dependent upon them.

The purpose of this blog is to provide a simple explanation of Disability Insurance - a product which protects our most important assets. I want to explain what "disability" means. (We all know what "death" means - but disability needs to be defined).

Now, I will endeavour to make this fun, and certainly interesting and informative. If you have any questions please ask. The value of this blog is significantly linked to the level of participation

Click these for more information on the respective topics :
Long Term Care Insurance
Disability Insurance
Critical Illness Insurance
Life Insurance
Mortgage Insurance